FocusChina gas pricing reform a must to ensure sustainable supply

21 November 2012 08:52[Source: ICIS news]

By Ricki Wang

SINGAPORE (ICIS)--China’s strong natural gas consumption is requiring a nationwide implementation of a market-oriented pricing reform to reflect the true value of the clean energy, which is in scarce supply, and help ensure sustainable long-term import supply for the country, industry sources said on Wednesday.

Pilot tests of the new pricing mechanism were conducted since last year in Guangxi and Guangdong in southern China, as the two provinces mostly derive their gas supply from liquefied natural gas (LNG).

In late 2011, Guangdong started receiving gas piped from central Asia, while Guangxi is expected to get piped gas by the end of this year.

Under the new pricing scheme, domestic gas prices are benchmarked to liquefied petroleum gas (LPG) and fuel oil, which are actively traded in the market.

The Chinese government is planning a phased implementation of the gas reform across the country but with no definite timeline.

Without the reform, China’s regulated domestic gas prices are deemed too low, with importers constantly facing the prospects of losses – a situation that is untenable as the country is expected to rely for a substantial portion of its gas requirements from overseas, industry sources said.

For 2012, the country is expected to procure about a third of its total gas requirements of about 147.7 billion cubic meters from abroad, with the share of imports expected to continue rising in the coming years, according to C1 Energy, an ICIS service in China.

Currently, China’s low gas prices and rigid government-dominated pricing mechanism is impairing a sustainable development of the upstream industry, and deter gas importers from procuring more volumes.

PetroChina, which is the country’s biggest importer of piped gas, saw its earnings from operatons of natural gas and gas pipelines shrinking by about 85% in the first half of 2012. Its gas imports totaled 12.76 billion cubic metres in the first six months of the year.

Calls for gas pricing reform are expected to intensify next year, industry sources said, but the Chinese authorities will have to weigh the need for the reform against the wider social repercussions of such a policy, industry sources said.

The Chinese government currently controls the domestic prices of natural gas, shielding its consumers from the volatility in the international energy markets.

The proposed revamp in gas pricing aim to open up China’s ex-works prices – or the cost of gas produced at the country’s gas fields to market forces – tying them with the price movement of LPG and fuel oil.

While there are criticisms over the use of LPG and fuel oil as the reference points in adopting a more market-oriented domestic gas prices, no other energy product benchmark is being suggested, industry sources said.

China Customs track the imports of LPG and fuel oil and the prices at which they were procured, making their usage as reference in the new pricing scheme “more transparent and official”, a source close to the Guangdong Development and Reform Commission said.

“LPG and fuel oil prices are more market-driven compared with other energies,” the source said.China needs to make its citizens understand that natural gas is currently undervalued, and the consequent increase in prices after adopting a market-oriented pricing scheme would promote a more efficient use of the precious resource, industry sources said.

Some proponents of the change in the gas pricing scheme are calling for a flexible mechanism, which sets different prices for different provinces/regions within China, industry sources said.

Introducing a single gate-price for gas for each province will allow competition to foster in the highly-monopolized industry, they said.

In the new gas pricing scheme that is still pending a nationwide implementation, all gas suppliers will be required to charge the same amount for buyers receiving supply in the same gate, regardless of the origin of the gas.

The old system links gas prices to the origin of the resource, thereby reflecting differences in production cost.

Once the new scheme takes effect, “gas producers will have to find ways to cut cost,” said a trader.